Finding the "Right" Price

[From iSource Business, July 2001] Every year Cutler-Hammer, a $2.5 billion division of Eaton Corp., has to respond to 250,000 orders for the company's electrical control products and power distribution equipment. Cutler-Hammer's small pricing staff has traditionally coped with this tsunami of sales requests using manual processes, because they lacked the e-business tools necessary to evaluate how each order fit into the company's overall business strategy. As a result, sales requests took as long as five days to process, and the company risked accepting deals that did not support its financial strategy.

Cutler-Hammer's dilemma is not unique. In fact, while e-business technology providers offer buying organizations a variety of tools to identify the right price for a good or service and to manage their spends more strategically, the sell side has been flying blind. But now, a handful of software companies have released applications that allow suppliers to determine their own right price and, moreover, to manage their customer response processes more strategically.

Up the Supply Chain Without a Paddle

The root of the sell side's dilemma has been the dearth of e-business tools tailored to the needs of selling organizations, according to Wilson Rothschild, a senior research analyst for applications strategies delivery at Stamford, Conn.-based research firm META Group. Most of the solutions in the marketplace are very buy-side oriented, he says. For example, e-procurement tools currently available promise to give buying organizations a better picture of prices across a variety of suppliers. Buyers who use e-marketplaces for that type of price discovery can seek lower prices from current suppliers and potentially lower their outlays without even incurring the switching costs associated with moving business to a new supplier. That's a win for the buyer, but what about the supplier who just found out it has to reduce its prices to keep a customer?

Right now, Rothschild says, suppliers don't have the tools they need to decide how best to maintain their margins. Traditionally, pricing knowledge has resided with each member of the pricing staff, who based decisions on their own experiences and their own assumptions at any given moment. Companies have had the visibility across their enterprises that could tell them what prices different divisions of the company are charging or even what prices different pricing managers are citing for the same customer. This leads to inconsistent pricing decisions, and frequently a pricing decision comes down to the head pricing person who makes the call based on a gut feeling, Rothschild said.

Companies have also lacked the tools necessary to track historical trends in pricing. Consequently, although they have business models to figure out what things cost, suppliers cannot measure the impact of past pricing decisions on margins. Absent this type of information, they cannot determine who is a good or bad customer, that is, whom they should prune from their customer list when faced with demands for price cuts.

The result has been what Daphne Carmeli, CEO of sell-side software provider Metreo, calls maverick selling a corollary to the buy-side bugaboo maverick buying. Maverick selling refers to instances in which manufacturers accept deals that are under cost or under target, or when a company spends time on the wrong deals, such as with clients that have no intention of buying, simply because the supplier does not have visibility into its pricing. e-Procurement advances on the buy side have made maverick selling a more acute issue for suppliers, Carmeli says: Now a buyer, with one click, can send one request to hundreds of suppliers. From a supplier's vantage point, there is now greater volume [of sales requests], more pressure to respond quicker, and there is more competition.

Fortunately for suppliers, companies such as Metreo and another software provider, Rapt, are beginning to offer sell-side applications that address the issues associated with maverick selling.

Taming Maverick Selling

Sales request response time, price consistency and margin pressure were the issues for Eaton Corp., a $9 billion global company that manufactures highly engineered products for the industrial, vehicle, construction, commercial, aerospace and semiconductor markets. At Cutler-Hammer, Eaton's electrical control and power distribution product division, the pricing team (about 60 people) was using a variety of internal data sources and in-house applications to manually process about 200,000 sales requests annually. With critical information spread among disparate systems, and some data available only in hard-copy form, the pricing team sometimes required as long as five days to process requests.

Eaton initially sought to speed request processing by developing a proprietary system. But during the 18 months that the company worked on its in-house software, e-business took off, increasing the number of orders coming into the company and making speed a more acute issue in the processing of sales requests. In the meantime, third-party software developers were bringing sell-side applications to market. Cutler-Hammer chose to implement an application from Palo Alto, Calif.-based Metreo. The software, called SR2 (for Supplier Response), deployed over 12 weeks, draws information from inventory, production and sales systems in real-time to generate a score for each incoming sales request, based on pre-defined criteria such as the value of the customer, expected impact on key strategic performance metrics, competitive environment, product availability, and plant capacity. The application allows the company to aggregate orders coming in over various sales channels and routes the scored requests to the appropriate pricing managers as a way to ensure pricing consistency.

Metreo's solution will allow us to see and understand how [a pricing staff person's] decision reflects our company's business goals and how profitable each deal is, says Ray Huber, director of e-business for Cutler-Hammer. With this information we will be able to make better decisions as we evaluate the potential impact of each request, ultimately allowing us to better serve our customers.

While Cutler-Hammer is still tracking the return on its investment, Carmeli explains that the return on investment for this type of supplier response application is three-fold. First, automation of the order response process reduces the time required to respond to each sales request, allowing pricing staff to handle a greater number of requests. Second, the software lets companies price smarter, eliminating deals that were priced under cost because, for example, an enterprising customer had contacted multiple salespeople before finding the one rep who was under quota for the quarter.

On a higher level, because this type of software allows pricing criteria to be set centrally, a company can implement a consistent pricing strategy and change that strategy on the fly across the enterprise to meet new business goals rather than having new policies filter down through a sale organization over the course of weeks. It enables companies, from a centralized pricing application, to understand the impact of market, channel and product interactions on revenue, market share and profit margin, says Jeff Starr, vice president of marketing for Rapt, a San Francisco, Calif.-based technology provider that offers an application called Rapt Sell. Starr says his company's software lets suppliers calculate the right price for a given product in the context of the supplier's overall financial goals.

With a typical implementation cost for Metreo's SR2 of $500,000 to $750,000, based on per-CPU pricing and including initial consulting and set-up fees, clearly these types of solutions are targeted at large manufacturers that generate sufficient sales volume to make the software worthwhile. Rothschild says increasing numbers of suppliers are recognizing that they need a sell-side visibility tool in order to sell more intelligently. But, he adds, seeing the software as a need and having a willingness to pay for it are two different things, particularly in economically uncertain times with increasingly tight margins.

Nevertheless, Rothschild predicts that eventually pricing visibility software will become a key competitive advantage on the sell side. Suppliers who don't have the tools can win more business by just selling like gangbusters, he says. The question is, are they selling smart?

NEXT UP: In the second of this two-part The Net Best Thing series, iSource examines new applications that promise to let buyers evaluate a wide range of factors in determining what the right price is for a given commodity or service.